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Friday
May262017

Franchisors: New Accounting Rules Will Significantly Impact Revenue Recognition

Franchise LawyerChair, Franchise & Distribution Practice Group

 

 

by Barry Kurtz

818.907.3006

 

 

An updated rule issued by the Financial Accounting Standards Board (FASB) will change when most franchisors may recognize revenue on their balance sheets from the collection of initial franchise fees.

Historically, initial franchisee fees were recognized as revenue upon receipt. Then, FASB Interpretation No. 45 mandated that initial franchise fees could not be recognized as revenue until the franchise unit opened for business. The result was additional cash on a franchisor’s balance sheet when the initial franchise fee was received, with a corresponding liability for the deferred initial franchise fee that remained on the books until a franchise unit opened for business.

Franchise Fee Accounting Sound Bad? It Gets Worse.

Recently the rules changed again. Effective as of December 17, 2017 for public companies, and December 15, 2018 for other franchisors, Accounting Standards Codification 606 issued by the FASB and the International Accounting Standards Board (IASB) will apply. The recognition of initial franchise fees will now have to be divvied up over the life of a franchise agreement.

For example, if an initial franchise fee is $10,000 and the term of the agreement is ten years, revenue will be recognized as $1,000 per year for ten years. This method will apply to multi-unit development as well – franchisors will not be able to recognize all initial franchise fees as revenue when the first location opens, but rather, as each location opens.  

The new rule could cause some problems.

Income will be reduced and liabilities will increase. The deferred liability will reduce the franchisor’s net worth and may trigger registration state restrictions on the franchisor’s ability to collect initial franchise fees when a franchise agreement is signed, which can adversely affect the system’s perceived value. Auditors may require franchisors to restate previous years’ financial statements, which could make a system look weaker as a going concern.

Additionally, restated financial statements could open the door to claims from unhappy franchisees that they were misled about a system’s financial condition. Growing franchise systems that rely on franchise sales for revenue could take a hit, as the system as a whole may be seen as less attractive to potential franchisees. 

Barry Kurtz is a State Bar of California Certified Specialist in Franchise & Distribution Law.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Wednesday
May032017

Working Families Flexibility Act Means Little to California Employers

Lawyer for EmployerEmployment Defense

 

by Nicole Kamm

818.907.3235

 

 

The House of Representatives just passed U.S. H.R. 1180, a bill that could potentially give certain businesses and their employees more flexibility in federal overtime compensation. The Working Families Flexibility Act (WFFA) would allow employers to award workers compensatory (“comp”) time off, in place of overtime premium pay for hours worked over 40 in a week.

Federal and State Overtime RulesUnder this bill, employers may choose to offer this option, and employees may decide if they would rather receive regular overtime pay or take compensatory time off at a later date. This “banked” comp time may be cashed out at a later date should the employee decide s/he would prefer to have monetary compensation rather than the time.

From an employer perspective, this could result in significant savings in operational costs, though it could be more challenging in the administrative sense. But for employers with staff in California, this bill would have little practical effect.

What Does H.R. 1180 Mean for California Employers?

First, there’s no word on whether or not the WFFA will pass the Senate. In the past, similar bills often cleared the House only to be killed on the Senate floor. (A more business-friendly political administration may mean greater possible success this time around, however.)

Second, and more importantly, state laws are clear regarding California overtime requirements. California employers are mandated to pay overtime at time-and-a half or double-time, depending on how many hours/days are worked.

CA overtime requirements are as follows:

  • All hours worked in excess of 8 hours in a workday or 40 hours in a workweek are paid at the rate of one and one-half times the regular rate of pay.

  • The first eight hours worked on the seventh consecutive day of work in the workweek are paid at the rate of one and one-half times the regular rate of pay.

  • Hours worked in excess of 12 in any one workday and hours worked in excess of 8 on the seventh consecutive day of the workweek are compensated at a rate of two times the regular rate of pay.

Employers should ensure they have clear, written policies regarding overtime compensation. For example, all employees should be aware (preferably via an Employee Handbook outlining company policy) that:

  • Overtime hours must be approved in advance by supervisors.

  • Unauthorized overtime will be paid, but could result in discipline or even termination.
  • Hours worked on weekends do no automatically count as overtime.

  • Sick, vacation, holiday or other paid time off cannot be used to calculate overtime compensation (unless your “company” is the Los Angeles Fire Department!). 

Nicole Kamm is an Employment Defense Attorney

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

Tuesday
Apr252017

Negative Reviews: Seeing Stars or Trolls? Here's What You Can and Can't Do

Franchise LawyerChair, Franchise & Distribution Practice Group

 

by Barry Kurtz
818.907.3006

 

 

Trolls aren’t just fictional creatures living under bridges in fairy tales – today they are anonymous but highly visible creatures plaguing individuals and businesses on social media. They’re angry, vindictive and financially destructive, particularly for businesses that rely heavily on reputation.

Franchise Reviews

Franchised businesses are not safe either. Though most customers recognize a national brand as having certain standards set by the franchisor, individual franchisees can still suffer from bad reviews – particularly those in service industries. Bad reviews can infect the entire system.

Recent lawsuits and legislation may address some of the problems of anonymous negative reviews and outright defamation. Most of these decisions and laws benefit the consumer, but there are some practical steps business owners can take to fight back.

Here’s what every business owner should know:

Non-Disparagement Clause Laws

First, clauses written into service contracts to protect the business from negative online comments won’t help. Incorporated into the fine print, this now infamous non-disparagement clause used by a hotelier in New York may have gone too far:

If you have booked the Inn for a wedding or other type of event anywhere in the region and given us a deposit of any kind for guests to stay at USGH there will be a $500 fine that will be deducted from your deposit for every negative review of USGH placed on any internet site by anyone in your party and/or attending your wedding or event. If you stay here to attend a wedding anywhere in the area and leave us a negative review on any internet site you agree to a $500 fine for each negative review.

For a franchise or business owner, $500 per negative review may not seem like much compared to the potential damage bad reviews wreak on future business.

That may have been how founders of Master Matchmakers felt, when the company chose to put a gag order clause in contracts with clients. When one client took to Yelp to express his dissatisfaction, the company responded in kind. The CEO denounced the client on Yelp as well, using the client’s employer’s listing to describe this particular lonely-heart customer as an “unscrupulous business person” who maligned Master Matchmakers for “personal gain just to extort money”, according to the L.A. Times.

Long before this incident though, legislators in California felt a need to protect consumers’ free speech rights. Thus the state enacted Assembly Bill 2365, a/k/a the Yelp Law, in 2014. Other states followed suit with similar legislation. And then it went federal.

Barack Obama signed the Consumer Review Fairness Act (CRFA, or the Act) in December 2016. The bill had non-partisan support.

The new federal mandate protects consumers expressing opinions about a business’s goods or services online – by penalizing businesses that threaten to act on, or actually try to enforce, non-disparagement clauses in their customer contracts.

In other words, companies that include gag order clauses prohibiting clients from posting negative online reviews can no longer enforce those contractual provisions, not just in California, but across the nation.

Before CRFA: Still a Losing Battle

Even before the federal CRFA went into effect, businesses had a tough time proving their supposed right to enforce the non-disparagement clauses in court. For example:

Palmer v. Kleargear.com: Husband and wife John Palmer and Jennifer Kulas ordered products amounting to less than $20 from kleargear.com, paying for the items via PayPal in 2008. The couple never received the items, attempted several times to contact customer service, and were eventually told the products weren't paid for, therefore the order was cancelled.

A few months later, Kulas posted a negative review on RipoffReport.com, criticizing the retailer's customer service reps.

Three years later, KlearGear sent a "Take Down" email to Palmer, demanding the couple remove the bad review within 72 hours or pay the company $3,500 – restitution for violating a non-disparagement clause in the business's Terms of Sale and Use (TSU). Arguments between the two parties ensued, and the retailer eventually submitted a negative report to a credit reporting agency.

In their lawsuit, Palmer and Kulas claimed violations of the Fair Credit Reporting Act, defamation (this story got national media attention) and emotional distress.

A federal court in Utah awarded Palmer and Kulas a default judgment – KlearGear failed to respond to the lawsuit. The judgment was more than $300,000 plus legal costs and attorneys' fees which the plaintiffs have yet to collect.

(This is the case that inspired legislators to write California's Yelp law, as well as the federal CFRA.)

Duchouquette v. Prestigious Pets, LLC: Robert and Michelle Duchouquette signed a $118 contract with Prestigious Pets of Dallas for pet sitting services. While on vacation, the Duchouquettes noticed via in-house cameras that their fish bowl was getting cloudy. Upon return, they gave Prestigious Pets a one star review on Yelp, explaining:

The one star is for potentially harming my fish, otherwise it would have been two stars. We have a camera on the bowl and we watched the water go from clear to cloudy. There was a layer of food on the bottom from way too much being put in it. Even if you don’t have fish, you should be able to see the change in the bowl and stop putting in food. Better yet, ask us how much to feed if you are unsure.

The pet service could have offered to refund the money in return for a better review. Instead, the business chose to “go nuclear”, suing for up to $1,000,000.

Prestigious claimed the contract did not cover fish care, though the sitter agreed to feed the fish anyway; and that media interviews with the Duchouquettes cost the company lost profits, devaluation of its business and other damages.  Prestigious also claimed the Yelp review constituted defamation because it:  was calculated to injure the business's reputation, alleged lack of pet care skills, and falsely accused the company of violating Texas's Cruelty to Non-livestock Animals law.

A Dallas district court judge threw the case out.

Fight Fairly and Thoughtfully

Franchise Online Reputation Management

Suing bad reviewers may be an uphill battle but it’s not impossible to obtain restitution, even from anonymous reviewers. Before initiating a lawsuit though, businesses should ask these questions:

Can the Business Handle the Truth?

Is there any veracity in what the reviews are saying? Honest feedback can be valuable.

Sometimes a slew of negative online commentary can stem from one employee’s attitude when dealing with customers – in that case a personnel change in either staff or management can turn the tide. Similarly, multiple comments about atmosphere could also be a problem – maybe it’s time to upgrade the lighting, furniture, restrooms or lease another space altogether.

Maybe it’s time to improve the menu or offer more choices. Franchisees should consult the franchise agreement and the franchisor to find out what changes, if any, will be allowed. Franchisors are reluctant to make substantial changes to their menus to satisfy individual tastes.

Have Stellar Reviews?

Almost every business has at least a few happy customers. Some of them are even generous enough to share their positive experiences online without being prompted to do so.

Business owners should try highlighting some of these and sharing them on social media; capturing screenshots and posting to the business’s Instagram and Facebook accounts; quoting the text on the business’s website; or retweeting when clients shout-out positively on Twitter. In short, a business should go viral with the good stuff. Again, franchisees should consult their franchise agreement and the franchisor to determine what they can post since most franchisors control system social media to protect their brand.

How Best to Respond to Reviewers?

Businesses should respond with caution, and in a positive way. Even if management responds via private message or email, the dissatisfied customer can still post the communication (or portions thereof) on social media.

Why do some negative reviews go viral? Most of the time, it’s because of the business owner’s aggressive response. (Click: SoCal restaurant rant re negative reviews, for an example of what NOT to do.)

Instead, try something along these lines:

Dear Ms. Doe, I’m sorry to hear you had such a negative experience at our restaurant, but do appreciate that you took the time to point out some problems. We are looking further into these issues. In the meantime, we hope you will revisit us soon, as we are working hard to remedy the problem. Sincerely …

This is a general, public response for something like Yelp or Facebook. Privately, management may want to also offer store credit, full reimbursement, free products, etc. in exchange for an updated review or a takedown of the negative commentary. Warning: Offering refunds in public may encourage opportunistic trolls to post more negative reviews, in the hopes of gaining some freebies. Proceed with caution.

The critical thing for any business owner to remember here, is the importance of monitoring reviews. Management should keep track of what’s going on with business listings on Yelp and TripAdvisor, on the company Facebook and Twitter feeds, on Instagram and Reddit.

The proper response could turn a disgruntled consumer into a life-long fan of the franchise system. The magic remedy may be a sincere reply from the president of the franchise, or it may take 100 bags of sour cream and onion potato chips, according to this post on fastcasual.com regarding negative restaurant reviews.

However management chooses to respond, it’s important to avoid knee-jerk reactions (give it a day or two), and react positively and logically – which means some posts may be safely ignored without too much damage. And remember that some franchise systems prefer to handle responses to online negativity at the corporate offices, while others will allow their franchisees a little leeway.

A business owner who can prove defamation by a reviewer may want to litigate after evaluating the financial damage. The trend for prevailing has historically been in favor of the reviewer, but there may be a sea change as more and more businesses decide to fight back.

Barry Kurtz is the Chair of our Franchise & Distribution Practice Group

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Thursday
Apr202017

Accidental Disinheritance: Update Wills, Estate Plans Annually

Gift Tax, Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

So you have an estate plan? Good for you. You funded it? Even better. But have you updated it and your will in the last year? If you haven’t, your loved ones or favorite charities may be in for an unpleasant surprise. Your ex-spouses, step-children, ex-partners or someone else you hadn’t considered may find themselves receiving a windfall.

Designate Beneficiaries AnnuallyDon’t subject your loved ones to accidental disinheritance. This commonly happens when clients fail to update their beneficiary list, particularly upon:

  • Divorce
  • Remarriage
  • Death of a Beneficiary
  • Birth of a Child

Divorce is one of the more common events to cause rancor (and potential litigation) among surviving family members when a decedent hasn’t updated designations.

In Hillman v. Maretta for example, the Supreme Court of the United States decided Judy Maretta, the ex-wife of Warren Hillman, was entitled to Hillman’s nearly $125K life insurance policy proceeds. Hillman and Maretta were divorced for a decade before Hillman passed – but he never updated his policy beneficiary designee. His widow and ex-spouse battled in court for five years before the Supreme Court ultimately decided the case.

There’s more to this story however, as Hillman lived in Virginia which has laws to protect subsequent spouses (California Probate Code §6122, also protects subsequent spouses). Under state law, Hillman’s widow/current spouse would have received the proceeds.

But since Hillman was a federal employee, his life insurance policy was governed by the Employees’ Group Life Insurance Act of 1954. Under this Act, the beneficiary designation prevailed over Virginia regulations.

Similarly, consider Egelhoff v. Egelhoff. In this case, David Egelhoff named his wife Donna Rae as beneficiary of his pension plan and life insurance policy – both of which were governed by the Employment Retirement Income Security Act of 1974 (ERISA).

Shortly after their divorce, David died in a car accident. David’s children challenged Donna Rae’s status as beneficiary, citing Washington state law which would have revoked benefits for her upon divorce. The trial court found for the children, but an appellate decision found for the ex-spouse, and was upheld by the Supreme Court.

Laws in many states will revoke an ex-spouse’s claims. However, we see that federal laws will often trump state regulations. Even when no federal legislation applies, it just doesn’t make sense to make your preferred beneficiaries fight for their inheritances in court, should some question arise as to your intentions. Why put them through the expense and aggravation?

Beneficiary Designation Gone Bad

Here’s one more scenario that isn’t clouded by laws governing federal employees – in other words, this could happen to anyone:

We are currently dealing with a situation in which a wife was insured under two separate life insurance policies, and then passed away. Her husband was the designated beneficiary for both policies. Unfortunately, he became very ill just before his wife passed.

When she did pass, the husband was unable to manage his financial affairs, and never collected the life insurance proceeds due to him when his spouse died.

Death benefits from both life insurance policies are now going through probate (of the husband’s estate) before being distributed to the surviving children. If the parents’ living trust had been named as the beneficiary of the policies, the Trustee could have collected the life insurance benefits either when the husband was alive or after his death, without a Probate proceeding. 

Getting sound advice regarding how to complete beneficiary designations is AS IMPORTANT as completing them.

To be clear regarding your estate planning objectives, ensure these assets’ designations are all up to date:

  • Bank & Brokerage Accounts – Trust

  • Life Insurance Policies – Designate Trust or Tax Planning Life Insurance Trust

  • Trusts – check who you named as beneficiaries and who you appointed as trustees each year

  • Retirement Accounts – Beneficiary designation form

  • Company Benefit Plans - Beneficiary designation form

  • 529 College Accounts - Beneficiary designation form

  • Transfer on Death Accounts - Beneficiary designation form 

Kira S. Masteller is a Shareholder in our Trusts & Estate Planning Practice Group. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Thursday
Apr132017

Negative Reviews: Franchises Pursuing Truth, Justice, & Defamation Claims

Franchise LawyerChair, Franchise & Distribution Practice Group

by Barry Kurtz
818.907.3006

 

Franchised businesses, particularly restaurants, hotels, automotive servicers and others have been falling victim to the digital age. Many consumers now choose the places they do business based on what they read on Yelp, TripAdvisor, and other internet review sites.


This is great for franchises with mostly glowing, 5-star reviews. But every now and then, a business may fail to please a customer, and the results can be financially hurtful, if not devastating. All it takes is one eloquently written negative review, or multiple not so well-written posts by one particularly angry troll.

So how should management react? Here’s what every franchise owner, manager and marketer should know about the legal ramifications.

Consumer Anonymity in Social Media

It’s all about protecting free speech. Most recently:

Twitter filed a lawsuit against the Department of Homeland Security, and Customs and Border Patrol to protect the identity of user @ALT_uscis.

This anti-government account is just one of many “Alt Twitter” profiles that have popped up since President Donald Trump moved into the White House. And @ALT_uscis proved especially vocal when it came to denouncing the president – which prompted a Customs and Border Patrol summons requesting Twitter reveal the identity of this user to the government.

Twitter refused to do so, primarily because the summons didn’t cite a compelling or legitimate reason for the social media platform to comply. The government withdrew its request, and Twitter has since dropped the suit.

Revealing anonymous user IDs has been historically unsuccessful:

An Oregon hotelier attempted to sue TripAdvisor for the scathing comments made by the site’s user “12Kelly”. This reviewer claimed to have stayed on the property in March of 2014, described the rooms and food as “nasty”, the owner a weed smoker, and a front desk employee as someone who was having phone sex, presumably in the presence of the TripAdvisor reviewer. The profile for “12Kelly” said the site’s user was from Prescott, Arizona.

Hotel management couldn’t find a guest from March 2014 hailing from Prescott that would have matched the “12Kelly” user profile, so they sued TripAdvisor for defamation and filed a motion to compel the website to reveal the identity of 12Kelly, with the intention of adding that user later as a co-defendant.

According to the Oregon Restaurant and Lodging Association, the defamation suit failed because of a state media shield law. 12Kelly remained anonymous, and TripAdvisor continued business as usual.

But a new day in cyber litigation is dawning, and we may be seeing sparks of hope in combatting anonymous reviewers. If a franchise or business is the victim of outright lies, and can prove that is so, a defamation suit may succeed.

Take the case of Yelp v. Hadeed Carpet Cleaning. Hadeed filed a defamation lawsuit against seven anonymous reviewers on Yelp who allegedly falsely claimed to be customers. Hadeed served a subpoena on Yelp, seeking the identities of these John Does.

Though Yelp objected because of free speech rights, a circuit court and an appellate court in Virginia enforced Hadeed’s subpoena. The appellate bench stated that free speech rights of consumers should be balanced against a business’s right to protect its reputation.

A Virginia supreme court decided for Yelp however, but strictly on jurisdictional grounds, saying Hadeed should have brought the suit in California where Yelp headquarters are located. The court refused to consider the First Amendment questions. Given that both the trial and appellate courts found for Hadeed, the company may have a strong case.

And a retailer in Texas recently emerged victorious against anonymous employees who posted derogatory comments:

Glassdoor, Inc. operates a free jobs website, which invites users to rate their current or former employer companies. Texas retailer Andra Group, LP claimed several comments on Glassdoor were false and defamatory. The statements said Andra’s hiring practices were illegal and in violation of labor laws; that racial harassment was common; and that the company hired illegal immigrants.

Andra did not intend to sue Glassdoor, but wished to investigate potential claims of defamation or business disparagement against the website’s users. Glassdoor argued First Amendment rights for their users and filed an anti-SLAPP motion – a motion to strike down a Strategic Lawsuit Against Public Participation.

The Appellate Court in this case rejected the First Amendment argument, as those rights must be balanced against legitimate business disparagement claims. It also denied Glassdoor’s anti-SLAPP motion, because Andra had evidence of monetary damages (loss of qualified job candidates and additional costs for new recruiting).

Andra was granted its petition to take depositions to learn the identity of two Glassdoor users. A defamation suit may be pending.

Franchises: Fight Fair, but Fight Back

As noted in a previous blog addressing a franchisor’s negative publicity, it’s tough to fight a bad review. First Amendment rights are fiercely protected in the U.S., and defamation is hard to prove.

However, it’s not impossible. And though some may want to force websites to reveal the identities of anonymous reviewers, this is not the most financially feasible option. Stay tuned, we’ll tackle other relevant laws concerning internet reviews as well as other options available for franchises fighting back, in our next blog: Seeing Stars or Trolls? Here's What Franchises Can and Can't Do.

 

Barry Kurtz is the Chair of our Franchise & Distribution Practice Group. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

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